While warehousing and e-commerce fulfillment operations have dominated headlines as primary drivers of industrial real estate, the sector has other factors driving demand as well. As shipping bottlenecks from a global pandemic and ongoing trade disputes make international sourcing increasingly difficult, more companies are considering reshoring manufacturing operations to the United States.
According to survey data from Thomasnet, 69% percent of manufacturing and industrial businesses report that they are likely to bring production and sourcing back to North America. Even without a pandemic or trade wars to contend with, reshoring to the United States has increased steadily since 2010. New automation technologies have also made reshoring more feasible for manufacturers. A survey from Gartner showed that 33% of businesses plan to move out of China by 2023, with many of those already having done so.
Given these factors, it stands to reason that manufacturers looking to reshore their assets will increasingly contribute to the overall demand for industrial real estate over the next several years.
Reshoring and Its Role in Industrial Real Estate
As manufacturers return production to U.S. soil, they will ultimately need to build or lease manufacturing facilities. Finding suitable real estate may prove challenging for many businesses as they seek to establish domestic operations. The following two issues will influence the impact of reshoring on industrial real estate.
Urban Blight
Many major U.S. cities were once manufacturing hubs, making them natural targets for companies to reestablish production operations. Manufacturers once benefited from a ready labor pool in high-population areas, while the cities themselves benefited from collecting taxes on good-paying manufacturing jobs—a win-win scenario for all involved.
Though manufacturing was once the heart of the U.S. economy, however, that hasn’t been the case for decades. As economic conditions became more favorable for manufacturers overseas, many American factories fell into disuse. Now, countless areas suffer from urban blight, where the manufacturing infrastructure that once drove the U.S. economy has crumbled. Blighted factories in many major cities have often become hubs for criminal activity, pests, mold, and more.
Restoring or destroying and rebuilding blighted properties has a positive economic impact on the surrounding neighborhoods and has been proven to reduce crime. Real estate developers can serve reshoring manufacturers by identifying blighted properties and working with local and state governments to restore them to their former glory. This will not only benefit the U.S. manufacturing sector as returning businesses seek viable real estate, but it also benefits the communities in which those businesses will operate.
Logistics Demand
Fulfillment and warehousing space were the primary drivers of industrial real estate demand throughout 2020. Driven by skyrocketing online grocery sales and a broader e-commerce boom resulting from the global pandemic, warehouse real estate is now experiencing record low capacity as online sellers and logistics companies grab up available space in primary and secondary markets.
There is significant overlap in properties that can serve both logistics and manufacturing needs. As manufacturers seek space to call home for their U.S. operations, they may find that distribution and fulfillment operations have occupied much of the available space in large market areas. As a result, manufacturers may be better served seeking locations in smaller cities or towns where the competition from the logistics sector is less fierce. While rural locations were once problematic for manufacturers due to low labor availability, that issue is not as pressing as it once was.
The pandemic may not have many silver linings, but an exodus from major metropolitan areas has expanded the size of the skilled workforce in less populated areas. This should make it easier for manufacturers to establish themselves in lower-population locations. Additionally, automation technologies now allow manufacturers to do more with less labor, so a sizeable labor pool has become lower in priority than in years past. Overall, this could be a boon for the nation’s rural industrial real estate markets.
About Phoenix Investors
Founded by Frank Crivello in 1994, Milwaukee-based Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.
